Wow, where do I begin. What a wacky ride the last 6 weeks have been. Recently reading a book written by a trader- he had some profound things to say- “the market will do what the market will do”. Sounds simple enough, but, what the freak? I submit posts on a blog where someone called the move upward- but oddly the same guy has been saying the same thing since last July. He quickly points out that he was wrong in January- but he hasn’t been right or wrong- he’s just been the SAME! The saying “a broken clock is right twice a day” fits here. Just like all the gloom and doomers that sell us books on Financial Armageddon- storable food, guns, silver/ gold etc. Sooner or later they are right- but they are against the rising tide for a long time. The hardest thing is to watch what is happening and ignoring what you “think” should be happening. I can not justify in my mind how we have had another quarter of earnings recessions and that translated to higher equity valuations. Remember the quarterly earnings season also factors into account stock buybacks that have hit record levels, so an earnings recession in spite of earnings per share manipulation by reducing the number of shares outstanding (which is the result of easy money policies). Someone pointed out that we have to look for future earnings- I remember a time when all traders were looking for the obvious time when a company with a dot com after their name- would result in profits and earnings- and they factored that into the price of the stock, today! It was a bubble based on a buying frenzy brought on by looking too far into the future and not using rational metrics of current valuation- everyone did it, and everyone justified doing it until the house of cards all came crashing down, bubbles have a nasty habit of ending that way! Objectively there are some serious problems with our current financial and economic situation, and in reality that doesn’t always translate into falling stock prices- it should- but it doesn’t always.
“Cognitive Dissonance” People tend to seek consistency in their beliefs and perceptions. So what happens when one of our beliefs conflicts with another previously held belief? The term cognitive dissonance is used to describe the feelings of discomfort that result from holding two conflicting beliefs.
If you “feel” the market is going to crash- you will naturally clink on links that would support your positions- sure, every now and then you look for the opposing situation- but easily find a way to dismiss THAT notion. And when you are wrong you justify those same actions to avoid the uncomfortable feeling that cognitive dissonance gives us. We support what we believe and we believe what we support- it’s innate self preservation- not ego. The second part of all this is you may not be wrong in your decision- the criteria for action may or not make you uncomfortable and that’s OK. We all have rules to live and trade by- and if the position doesn’t fit our belief system or our rules we SHOULD NOT ACT. Holding NO positions is a POSITION! The inflated egos- will point out that they called this move- in spite of ALL the facts that made this move uncomfortable to everyone of us with opposing rules. I missed the 6 week move- and if it happened again 30 times- 30 times I would be on the sideline- not ignorance- the events and metrics that led to this move Do Not Qualify for me staking a claim, pure and simple. Taking a position that doesn’t fit my criteria- is just as dangerous and irresponsible as not taking a position that does fit my criteria.
We’ve been here before- with even more positive metrics then we currently have- will the market go higher? Maybe, they say you can’t fight the FED, the problem is No One Knows Where the FED Will Go! If Yellen is Dovish the market will make new highs- if the FED returns to a position of normalizing, we can expect at least a short term pullback.